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Overcoming the limitations of variable renewable production subsidies as a means of decarbonising electricity markets

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  • Nelson, Tim
  • Rai, Alan
  • Esplin, Ryan

Abstract

The limitations of production subsidies for variable renewable energy (VRE) plant as a means of decarbonising electricity markets are well known. Despite this, production subsidies for VRE plant are the most prevalent form of policy intervention in Australia. In the absence of cost-effective storage, production subsidies for VRE plant can create incentives to produce electricity at times the system may not need it, thereby severing the link between the spot market and financial incentives to generate. Such production subsidies can also reduce the incentive for new VRE plant to participate in ‘firm’ forward derivative markets. In this paper, we examine two adjustments that could be made to production subsidies for VRE plant that would correct for these unintended consequences. Firstly, the quantum of the subsidy could be a function of the wholesale electricity price, electricity demand or emissions; and secondly, new generators would be ineligible to receive production subsidies without demonstrating that they are facilitating the supply of financial derivative contracts. The effect of both adjustments would be to increase the incentive of VRE plant to demand-follow; that is, make its output ‘firmer’.

Suggested Citation

  • Nelson, Tim & Rai, Alan & Esplin, Ryan, 2021. "Overcoming the limitations of variable renewable production subsidies as a means of decarbonising electricity markets," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 544-556.
  • Handle: RePEc:eee:ecanpo:v:69:y:2021:i:c:p:544-556
    DOI: 10.1016/j.eap.2020.12.018
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    References listed on IDEAS

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    More about this item

    Keywords

    Electricity market; Production subsidy; Variable renewable energy;
    All these keywords.

    JEL classification:

    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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